Managers stopped from using loophole

Finance Minister Michael Cullen says he will close a loop hole in the law which fund managers have been looking at exploiting.

Wednesday, November 7th 2001, 6:34AM

A possible loophole in the law that may allow unit trust managers to take advantage of excess imputation credits to achieve an unintended windfall gain at a potential cost to the revenue of $30 million is to be closed.

"The change will clarify that managers cannot take advantage of section CF2(15) of the Income Tax Act to generate excess imputation credits following a simple redemption of units," revenue minister Michael Cullen says.

Investors in unit trusts usually dispose of their units by selling them back to the unit trust manager at market value. The manager then redeems them at the same time with the unit trust.

This is usually a straightforward operation in which the manager does not make a cash gain or loss.

"The government is aware that some managers are trying to use the excess imputation credits arising from these transactions to offset their other income," Cullen says.

"It was never the intention of the law that imputation credits gained in this manner should be used in such a way."

Cullen says the law will be amended to ensure that when unit trust managers redeem units in the ordinary course of their business they will not be able to use the excess imputation credits arising from any dividend received if it merely reflects the manager's purchase costs of the units.

The change, once enacted, will apply from today with effect from 1 April 1996, when the relevant rules came into force. It will not apply to unit trust managers who advised Inland Revenue before the date of this announcement that they intended to adopt or had adopted the position that this proposed amendment addresses.

The amendment will be included in the tax bill to be introduced to Parliament in December.

Cullen says the bill will also address the 'negative'dividend' issue. The change will allow unit trusts to use lost available subscribed capital that arises when units are redeemed to cover shortfalls in their imputation credit accounts.

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